Capital gain on sale of assets of Permanent Establishment (PE) is taxable in India even when PE ceased to exist

Facts

• The assessee a Cyprus company, was registered as a foreign company under the laws of Mauritius. The Mauritian tax authorities had issued a tax residency certificate to the assessee.
• The non-resident assessee owned a jack up rig which was used for drilling, prospecting and production of hydrocarbons in the offshore oil fields of India. The rig was given on charter basis to an Indian company which in turn leased it out to another Indian entity.
• The assessee had a PE in India. The rig was part of the said PE. The PE was taxed on net income basis after allowing depreciation on the said rig. Pursuant to the claim of depreciation on the rig the assessee had incurred losses in earlier years.
• The assessee had intimated vide a letter to its jurisdictional assessing officer (“AO”) that pursuant to the termination of the agreement with the Indian entity, it has discontinued its business operations in India and accordingly has moved the said rig from Indian territorial waters to international waters.
• The assessee had entered into an agreement with another foreign company for sale of the rig prior to the date when Indian PE ceased to exist. Pursuant to the agreement the buyer had acquired substantial right with respect to the rig and only the delivery was postponed. An invoice was issued by the assessee evidencing the sale of the rig. The said invoice was notarized outside India wherein the notary public has mentioned that, the invoice is signed and delivered. The buyer had inspected the rig and satisfied himself about the same and accordingly, deposited 25% of sale consideration. All these events took place much before the cessation of PE in India.
• The assessee for the relevant tax year had filed a NIL tax return. In the tax return it did not mention about the sale of rig. An audit was conducted by the AO and returned income was accepted.
• Subsequently, the AO reopened the assessment proceedings of the relevant tax year on the basis that the assessee had earned capital gains on sale of rig which has not been taxed in India since, it was not disclosed by the assessee. The capital gain from the sale of rig was taxed as short term capital gain by AO and upheld by the Commissioner.

Issue Before the Tribunal:- Whether the gain arising on sale of rig is taxable in India since the PE has ceased to exist. Decision of the Tribunal

Observation Under the Indian Income Tax Act 1961